Portland, Vancouver apartment vacancies keep rising

Fredrick D. Joe, The OregonianGerding Edlen Development Co. started the 16-story Cyan in downtown Portland as a condo building. When the condo market stalled, the firm flipped it to apartments, adding it to a growing list of luxury apartment towers competing for tenants amid rising vacancies.Apartment vacancy rates will continue to rise through 2010, and the trouble will be most acute in Clark County and Portland's downtown towers, according to apartment brokers and appraisers.

Typically, a bad housing market drives up apartment demand.

But the job market is so lousy -- Oregon's unemployment rate rose to 11 percent in December -- that it's pushing young people to move back in with their parents or double up with friends. If you want your own indicator, watch for those "Free Rent!" signs in front of apartment complexes.

Mark D. Barry, an appraiser who publishes the Barry Apartment Report, expects the overall vacancy rate will rise to 7 percent or 7.5 percent by the end of 2010. That's up from about 6 percent in fall 2009.

"While there are noticeable signs of an improved economy, commercial real estate is usually slow to recover," Barry wrote in his report, a well-known industry barometer of the Portland-area apartment market, for winter 2010. "I expect the first half of 2010 to be rocky, with some limited signs of recovery of jobs in the second half of the year, but no visible recovery until 2011."

Barry says apartment buildings close to downtown Portland will do relatively well in 2010, sparked by steady demand from twentysomethings.

But a massive oversupply of spendier downtown apartments will create more trouble for some landlords, and Clark County's 14 percent unemployment rate, the highest in Washington, will empty out units there.

View full sizeBarry said more than 3,100 luxury units will be brought on the market between mid-2008 and late 2010 in central Portland.

That oversupply has driven rents -- once a month or two of free rent is counted -- down by as much as 30 percent below developers' expectations.

Apartment towers that originally were supposed to generate monthly rents of $2.50 a square foot are instead collecting $1.80. For a 1,000-square-foot apartment, that's a drop in rent from $2,500 to $1,800.

"The luxury market is problematic," said Gary Winkler, a senior apartment broker at Colliers International in Portland. "It's extremely competitive."

NAI Norris, Beggs & Simpson is far more optimistic. The firm says the luxury units are filling up well and that landlords' offers of free rent should mostly fill those units by late 2010.

In the metro area, the average rent on a two-bedroom, one-bathroom apartment was $727 at the end of 2009. The rate was highest in downtown Portland, at $1,180 and lowest in Vancouver, at $651, according to NAI Norris, Beggs & Simpson.

Colliers International says Portland was the only submarket to report any rent growth in 2009. Even there, rents rose just 0.8 percent. Beaverton rents fell 6 percent; Tigard and Wilsonville, 5 percent; and Gresham 3 percent.

Across the region, Colliers expects little to no rent growth for 2010, and landlords will continue rent concessions as they compete for a limited number of tenants.

The U.S. credit crisis and rising vacancies drove apartment construction to a near-record low. Barry said permit filings showed 850 new multi-family units in 2009 when the average for the last 10 years was 4,000. The record low of 793, he said, occurred in 1983 during the state's last crippling recession.